CONSULTATION PAPER FOR TARIFF REVIEW

BY

ENUGU ELECTRICITY DISTRIBUTION PLC

JUNE 2015

RESPONSES TO THIS
CONSULTATION PAPER ARE DUE BY 10TH JULY, 2015
CONTENTS

Contents 2

Introduction 3

Background 6

Industry Challenges 8

The Tariff Review Process and Areas Under Review 9

Our Investment Plan 15

How You Can Help us 17

Let Us Know What You Think 18

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1. INTRODUCTION

Why do the prices need to be reviewed again?

1.1 Electricity is similar to any other manufactured product. However,

because of its peculiar nature, it is instantaneously supplied and
consumed. As a product, the price paid by consumers must be
sufficient to at least cover the cost of production otherwise supply will
be in jeopardy.

1.2 In the past, electricity prices have been lower than the costs of running
the electricit y business. This is why not enough money has been
available for improving power supply. We have all suffered.

1.3 The tariffs in the past were supposed to cover costs, but they did not
cover all the cost of losses. These losses are partly because of the
technical challenges in the network, but mainly because of people
stealing electricity or not paying bills, and also errors in the information
we have about our customers.

1.4 We made promises to make things better when we took over the
Company. In return, we were promised that the prices we charge for
electricity will cover all our costs.

1.5 At the moment, our prices do not cover all our costs. This means that
we have no money left over to invest in the business. It also means that
we cannot pay the generation companies (Gencos) all the money
they are owed to supply more electricity.

1.6 Tariffs are being reviewed again because the current tariffs are not
sufficient to pay the Gencos, TCN, service providers and the Discos. As
a result, everybody is suffering. We need to make sure the tariff is
reviewed to a level that can work for all of us.

1.7 We want to ensure that all our customers in Abia, Anambra, Ebonyi,
Enugu and Imo State are carried along in the review process so that
everyone will understand why they have to pay the prices that will be
announced after the process.

1.8 The tariff review process requires that we have meaningful interactions
with our customers and stakeholders. We will listen to all your comments
and explain the process to you in more details. It is our hope that we
can all work together to move the industry forward – more electricity
for customers, faster fault clearing, more meters and accurate bills.

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When will I get more electricity?

1.9 EEDC does not generate electricity, we only distribute it. We are
supplied electricity from Gencos which are independently owned. Our
supplies are delivered to us through the National Grid, which is owned
by Transmission Company of Nigeria (TCN) for final distribution to our
customers’ homes, offices, schools, business locations etc. Gencos, TCN
and service providers do not relate directly with customers, and so
have to rely on us to collect their money from you and send to them.
Consequently, a large part of the money we collect from you as tariffs
are sent back to Gencos, TCN and service providers. By making sure
we pay their bills, we hope they can fix old plants and give us more
electricity. Moreover, if the Gencos get paid, more people will go into
generation business and generate more electricity.

1.10 More electricity is important for all of us. A lot of our costs do not
depend on how much we supply. This means that if we get more
electricity and collect more money from people who do not pay at the
moment, we will be able to reduce our prices.

1.11 Even if the Gencos generate a lot more power, we still need to have a
good National Grid to evacuate the power from the Gencos and bring
it to us so that we can deliver it to you. However, because TCN is not
getting paid fully for what they are delivering to us to give you now,
they will not have money to repair and expand the National Grid to
bring more electricity.

1.12 EEDC is trying to get some people to come and generate electricity
directly to us without going through TCN’s National Grid. But the price
that they want to sell it to us is more than the price that we are
currently selling it to you. We need a tariff review to be able to sign the
contract for them to generate directly for us to sell to you.

Does that mean electricity prices are going up now?

1.13 We do not set our tariffs on our own. We are regulated by the Nigerian
Electricity Regulatory Commission (NERC). But we have come up with
principles on how we will set prices that will be fair to our customers,
and NERC will decide whether the tariff we are asking for is fair to all
our customers. To make sure we get this right, we want to hear what
you think.

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1.14 We cannot say if prices will go up or down until we complete the
process with you, and see what NERC approves. We suspect that it will
vary with each tariff class. A lot will depend on how many customers
are in each tariff class, how much of the total energy they consume
and other statistical and scientific factors. We may even create a new
tariff class if that is what it takes to ensure fairness to customers.

Might prices change again after this review?

1.15 Yes. There will be a major review by 2020. There will also be two minor
reviews every year. Minor Reviews consider macro-economic changes
over which we have no control, like gas prices, inflation, exchange
rates and the level of electricity generation.

We welcome your views on our plans.

Please read this consultation document and let us know what you think.
Please give us your comments before 20th July, 2015.

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2. BACKGROUND

2.1 The electricity industry in Nigeria is regulated by NERC, a body

established by the EPSR Act, 2005, and charged with responsibility for
regulating the tariff paid by electricity consumers. Under section
32(1)(d) of the Act, NERC has a responsibility to regulate tariffs in such a
manner as to:

ensure that the prices charged by licensees are fair to

consumers and are sufficient to allow the licensees to finance
their activities and to allow for reasonable earnings for efficient
operation.

2.2 NERC regulates tariffs through a tariff methodology known as the Mult i-
Year Tariff Order (MYTO), a 15 year tariff path that undergoes major
reviews every five years, and two minor reviews every year (usually in
June and December).

2.3 The tariffs in the past were supposed to cover the costs of running the
electricity business. However, they did not cover all the cost of losses
that arise partly because of the old equipment in the network, but
mainly because of people stealing electricity or not paying bills, and
also errors in the information we have about our customers. This
aggregation of losses is commonly called the Aggregate Technical,
Commercial and Collection (ATC&C) loss.

2.4 This is why not enough money has been available for spending on
improving power supply.

2.5 When we took over EEDC, we signed a Performance Agreement with

the Federal Government wherein we undertook to make things better.
In return for our obligations, the Federal Government promised that the
prices we charge our customers for electricity will cover all our costs, in
line with the EPSR Act .

2.6 However, because the tariffs do not cover all our costs at the moment,
we have no money left over to spend on meeting our obligations in the
Performance Agreement. It also means that we cannot pay the
Gencos, TCN and service providers all the money that is needed to
sustain the electricity supply industry.

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2.7 In line with NERC’s Tariff Review Guidelines, we have come up with
principles on how the prices to be paid by our customers could be set
in a fair and transparent manner. We have articulated a tariff under
which EEDC will under-recover its revenue requirement for a while, and
to make up the deficit later. In this way, we hope to avoid price spikes.

2.8 NERC has the responsibility to decide whether what we have proposed
is fair for all our customers.

2.9 Because of the unsettling developments in the electricity industry since

the beginning of 2015, NERC has agreed with the Discos that a new
tariff review is required. It is hoped that the exercise will produce a
credible and cost reflective tariff that will restore confidence in the
market, and all stakeholders.

2.10 To ensure that we get this right, we want to hear what you think. We are
starting our tariff review by consulting with all relevant stakeholders. This
Consultation Paper is designed to give you the information you need to
understand the principles we will follow in reviewing our prices and to
comment on our approach.

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3. INDUSTRY CHALLENGES

3.1 The challenges facing the Nigeria electricity sector are many, and they
include the following:

(i) Inadequate generation owing to unavailability of gas, among

others. Currently, most of Nigeria’s electricity is generated from
gas. Because gas supply to the power sector has been very
unreliable, Gencos do not often generate as much electricity as
they could. This means that we do not receive enough electricity
supply to meet our customers’ needs;

(ii) An old and weak national transmission grid, which means that
Gencos cannot always get their electricity to the Discos;

(iii) Discos’ distribution lines need major repairs and expansion, but
Discos do not have money to make the needed investments,
instal meters, change bad transformers or effect repairs;

(iv) Banks will not lend Discos money to repair their networks or buy
meters and transformers until t hey are sure that the Discos will get
the tariffs that will enable them collect enough money to repay
loans. The loan that CBN is giving to Gencos and Discos was
based on the agreement that tariffs will be cost -reflective.

3.2 The major reason behind these challenges is that for very many years,
not enough money was spent on maintenance, repairs and expansion.
It will take some more years before supply will be as good as we need
it . We all need to work hard to make sure that this happens as quickly
as possible.

3.3 The electricity used by customers is provided to us by Gencos. When

we pay the Gencos’ bills promptly, they will have money to fix old
plants, procure more gas, and give us more electricity. We also want to
procure more power locally and nationally through embedded
generation. We cannot directly control how much electricity we get,
but we will do everything we can to get as much electricity as possible
to our customers.

3.4 More electricity is important for all of us. A lot of our costs are fixed and
do not depend on how much we supply. That means that if we get
more electricity, we will be able to reduce our prices by spreading our
fixed costs over a wider base.
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4. THE TARIFF REVIEW PROCESS AND AREAS UNDER REVIEW

4.1 How Our Prices are Regulated

4.1.1 Electricity supply is a regulated sector, and the amount of revenue,

and the prices that EEDC, or any other Disco can charge, are capped
and regulated by NERC.

4.1.2 The revenue we are allowed by NERC is based on our investment plans
for improving supply, and the cost of running our business. Our biggest
costs each month are bills from Gencos for the electricity they supply,
payment to TCN for transmission and other services, staff salaries and
network repairs. At the moment we do not get enough money each
month to meet these costs. That means that we do not have any
money left over to start our planned invest ments in meters, transformers
and network expansion.

4.1.3 We do not get any tariff subsidy from the Government. MYTO 2
Distribution Tariff Order stipulated that the Government would provide
a tariff subsidy, which was to be phased out in June 2014, when it was
hoped that a viable tariff for the industry would have been established.
However, Government’s payment of the subsidy was very irregular.
Moreover, none was paid between handover in November, 2013, and
June, 2014, when the intervention was phased out.

4.1.4 In the absence of subsidy, the only way Gencos, TCN and Discos can
cover their costs is through the tariffs we charge you. This is why we
need cost reflective tariffs to let us meet our obligations in the
Performance Agreement and improve our supply to you.

4.1.5 The purpose of this tariff review is to ultimately set a tariff that is fair to
customers, yet sufficient for everyone in the electricity sector to
improve our supply to you.

4.1.6 Many of the forecasts that go into calculating the tariff are provided by
NERC as standard for the industry. These include macro-economic
projections for inflation, foreign exchange rates, gas prices, cost of
generation, cost of transmission and many more. Importantly, NERC will
also provide a forecast for the expected increase in generation over
the next 10 years.

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4.1.7 There are some other aspects of the tariff that we can propose to NERC.
We want to check that our approach is right for our customers too, so
we welcome your views.

4.2 We are proposing an approach that is fair to everyone

4.2.1 A lot of our costs are fixed. This means that as we receive more
electricity from generators, the cost of each unit we supply to
customers goes down. Also, once we can make the investment to
meet our obligation to reduce ATC&C losses, the cost for each unit we
supply will go down. Supply and prices should get better if everyone in
the electricity supply chain can make the investment needed. More
electricity means good news for prices!

4.2.2 Investment in new generation takes time and as a result , a tariff level
that would recover all our costs today would be much higher than the
current level.

4.2.3 We are therefore proposing a “sculpted” tariff regime that is spread

over 10 years. Even though we are losing money, we will not increase
our prices excessively now. We will be patient and recover our losses
over a longer term. We will spread the cost over 10 years. After 10
years, tariffs will be reviewed and we hope to be able to start reducing
tariffs by then.

4.2.4 It is important to note that although we are proposing a sculpted tariff,

prices may go up or down sometimes to reflect changes in the
economy that we cannot control, like inflation, foreign exchange rate
and fuel prices.

4.2.5 Our business will still be losing money for a few years. But we can keep
our promises to install meters and connect new customers because
you agree to pay current tariffs for a bit longer once we reduce losses
and costs. We believe this is fair to everyone.

4.3 Tariff components: the Fixed Charge

4.3.1 The customer’s bill has two components - the fixed charge and the
energy charge.

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4.3.2 The energy charge is the amount billed for the actual energy delivered
and consumed by an electricity customer, measured in kilowatt hour
(kWh).

4.3.3 The fixed charge is independent of consumption, and is charged on a

monthly basis so that the Disco can recover some of the costs
associated with the fixed or permanent investments required to
generate, transmit and distribute electricity. In the same way, Discos
also have to pay Gencos capacity charges, which are also
independent of generation to cover Gencos’ fixed costs.

4.3.4 The reality is that a big part of a Disco’s costs are fixed, and the fixed
charge is meant to partly reflect these fixed costs. Most electricity
utilities around the world have a fixed charge because it is necessary
to ensure the sustainability of the industry and drive investments.

4.4 Tariff components: Maximum Demand

4.4.1 Some categories of our larger customers make heavier demands on

the network at some times than at others. These large “pulls” on
electricity can cause inefficiencies in the distribution network.

4.4.2 Large consumers with a high maximum demand are expected to install
power factor correction equipment to avoid distortion and damage to
the network. However, this was not enforced in the past in our area.

4.4.3 Our tariff application will introduce additional charges called “kVA ”
and “Maximum Demand” charges to ensure that the biggest
consumers pay based on the way they use electricity, and abide by
the strict standard of operation to help us deliver as much electricity as
possible to all our customers.

4.5 ATC&C Losses

4.5.1 EEDC’s NERC-verified and validated baseline ATC&C loss is 59.1%.

However, we have an obligation to reduce it to 11.57% over a period
of five years.

4.5.2 Our proposal to NERC will provide evidence of our actual losses. Once
we have a sustainable long term tariff, we will be able to invest to
reduce these losses.

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4.5.3 We ask for the help of all our customers by paying for the electricity
they consume, reporting incidences of electricity theft and any
fraudulent behaviour on the part of our staff providing services to you
on behalf of our Company.

4.5.4 It is hoped that with improvements in the networks, which are part of
our investment plan, these losses will reduce significantly. This is vital to
enable us to improve service delivery to our customers.

4.6 Embedded Generation

4.6.1 We are keenly aware of our customers’ frustration with shortages in

power supply and the associated negative consequences.

4.6.2 The generation challenges have led us to consider, in the short term,
the procurement of additional power through embedded generation.
These new, smaller local generators will help us to reduce our over-
reliance on the national grid.

4.6.3 In this wise, we have formally applied to NERC for approval to procure
additional 175 MW through embedded generation, and our request for
expression of interest from developers was advertised earlier this year in
national newspapers.

4.6.4 However, embedded power generation costs more, because the units
are smaller. But we will use a transparent and competitive process to
get the best value possible, under the superv ision of NERC. We will
therefore be asking NERC to make allowance for this in our tariff.

4.7 Rate Design/Customer Reclassification

4.7.1 Our tariffs are currently designed so that residential customers that
consume the least energy pay the lowest tariffs. Currently, this favours
the R1 and R2 tariff categories. However, other customers (larger
residential, commercial and industrial) customers that consume more
energy are paying more.

4.7.2 We want to keep this principle. However, we have found that within
the larger residential, commercial and industrial customers, some
actually consume even much more than others. As such, it may be fair
to break them down further into more tariff classes.

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4.7.3 We are considering different rate designs that will be fairer to everyone.
This will involve a review of our customer classification, and we expect
to form some at least one tariff category, particularly from R2.

4.7.4 We will also ensure that all customers are assigned the right class, and
that no customer is subsidising any customer.

4.8 Customer Numbers

4.8.1 The current tariffs do not accurately reflect the current number of
customers and the way we expect customer numbers to grow.

4.8.2 We are in the last stages of selecting the project contractors for a
massive customer location and assets data capture and customer
enumeration project. The project is scheduled to commence in
November, 2015, and will run alongside the first phase of our metering
roll-out. The result from the enumeration, which will be factored into the
tariffs, will give us a true account of our customer numbers and its
growth pattern. It will also help us to properly classify our entire
customer population.

4.8.3 This will also help us develop an accurate customer database and
improve our customer service to you.

4.9 Load Allocation Rebalancing

4.9.1 In electricity distribution, every customer belongs to a particular tariff

class. The amount of energy consumed by all customers in each class
affect s our total revenue because customers in different tariff classes
do not usually pay the same amount for energy consumed. Load
Allocation is the process of determining how much energy is consumed
by customers in each class and a correct load allocation is necessary
to make our revenue calculation is as accurate as possible.

4.9.2 Our tariff submission to NERC will capture the results of our energy
demand assessments and the attendant load rebalancing projections
to give a more accurate load allocation among our customer classes.

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4.10 Revisions to expected operational and capital costs

4.10.1 The capital and operational costs currently provided for in our
regulated tariffs were decided before we took over the business, and
do not exactly reflect our full investment plans.

4.10.2 We believe some adjustments are necessary in order for us to match

our investment plans. The adjustments will ensure that we meet our
performance targets and provide the most efficient service to you.

4.10.3 As a separate matter from the rest of this consultation, we will be

requesting NERC to consider revised capital and operational costs that
match our investment plans. This is largely because the company’s
equipment and network is worse than everyone expected when the
initial investment plan was made.

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5. OUR INVESTMENT PLAN

5.1 The successful conclusion of this tariff review exercise will enable us
achieve our Investment Plan, which is essential for meeting our target
of improved service delivery to our customers.

5.2 The Investment Plan is designed to allow us to meet our promises to

you. Some important aspects of the plan include the following:

Metering for Maximum Demand Customers

5.2.1 We are using our Maximum Demand (MD) customers to begin

the implementation of our metering roll-out . All necessary
contracting has been concluded, and all our unmetered MD
customers will be metered between June and December, 2015.
We will also replace all non-functional MD meters within this time.

Mass Metering Plan

5.2.2 The contracting for EEDC’s mass meter roll-out is nearing

completion, and will be preceded by a technologically driven
customer location and assets data capture. The mass metering
plan will be in two phases, namely:

(i) Phase 1, which will run from November 2015, to March

2016. Within this period, 22,550 Non-MD meters will be
installed; and

(ii) Phase 2, which will run from 2016 to 2017, and during which
any existing metering gap will be covered.

CAPMI Implementation

5.2.3 It needs to be stated from the outset that the Credited Advance
Payment for Metering Implementation (CAPMI) is not part of
EEDC’s Investment Plan. Rather, it is a laudable customer
financed metering initiative from NERC that is aimed at helping
the Discos to close the metering gap.

5.2.4 We were forced to request design modifications to the CAPMI

scheme from NERC when we observed the terrible abuses the
meters in our network had been subjected to through by-pass,

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 load diversion and cloning. The modification sought will help us
to combat these abuses. NERC recently granted our request and
our customers can now take full advantage of the scheme.

5.2.5 Under the CAPMI scheme, customers who cannot wait for our
general metering roll-out can get meters within 45 days of
payment of the NERC-approved price. The cost of the meter less
costs associated with installation will be refunded to the
customer over a period of time through a reduction of the
monthly fixed charge. Our plans to give massive publicity to the
scheme are at an advanced stage.

Improvement in Service Delivery

5.2.6 We recognize that our service delivery is yet to meet our

customers’ expectations in many respects. This is despite our
ongoing efforts at clearing faults, replacing damaged or
obsolete equipment, general network reinforcement, etc, within
the limits of available resources.

5.2.7 In order to improve our services to our customers, we advertised

in three national newspapers and the Federal Tenders Journal,
between March and April, 2015, requesting qualified vendors
and contractors to tender for:

(a) the supply of various types of distribution equipment,

including transformers, cables, poles and fast moving
distribution spares;

(b) the construction of relief substations in all the five States of

the South-east;

(c) the rehabilitation and re-conductoring of 0.415 KV, 11KV

and 33 KV Lines in all the five States of the South-east; and

(d) trace clearing of 0.415 KV, 11 KV and 33 KV Lines in all the

five States of the South-east.

5.3 The processes for procuring the equipment and services are nearly
completed and our customers should expect marked improvement in
services very soon.

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6. HOW YOU CAN HELP US

6.1 Our goal is in line with one of the principal objectives of the EPSR Act ,
as stated in section 32(1)(c) of the Act, namely:

To ensure that an adequate supply of electricity is available to

consumers.

6.2 The task is a massive one and requires cooperation from everyone. The
responsibility belongs to all of us.

6.3 We have undertaken binding obligations to improve our service to our

customers. We also want promises from you, our customers, in return for
connecting to the network.

6.4 We ask you to:

(a) Pay your electricity bills on time;

(b) Report anyone working for our Company who does not meet our
strict standards of honesty and integrity;

(c) Report anyone you suspect of electricity theft; and

(d) Report anyone you suspect of tampering with our equipment,

such as meters, transformers, poles, etc.

6.5 When you help us to spot and address problems, you help us to give
you lower prices in the future. Thank you for your help.

6.6 Please remember that there are laws against stealing or tampering
with our supply:

6.6.1 Stealing of elect ricity is a felony punishable by imprisonment

under the Criminal Code.

6.6.2 Tampering with electric fittings, meters, etc, is an offence under

the Miscellaneous Offences Act, and is punishable with
imprisonment for a term of 21 years or life (see Section 1[9] and
[10]).

6.7 We will enforce these laws much more strictly in the future to make sure
that everyone pays a fair price for electricity.

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7. LET US KNOW WHAT YOU THINK

7.1 We welcome the views of our customers (Residential, Commercial,

Industrial, Special and Street Lighting), customer associations, other
associations, local and state government s, or anyone who has an
interest.

7.2 You are invited to present your comments to this Consultation Paper
within two (2) weeks following its publication. Please give us your
comments not later than 10th July, 2015.

Our contact information

7.3 You can let us know what you think about our proposals for the tariff
review by calling us on: 08182502588

You can also email us at: info@enugudisco.com

Or visit our website: www.enugudisco.com

Other Issues

7.5 If you have other questions or complaints about your accounts, please
visit us get at our various District customer complaints handling units.
You can also call us on the following Customer Care Line: 08121020423

7.6 For reporting suspected theft or tampering with our equipment , please
call us on: 08182502588 and 08121020423

7.7 For reporting a member of our staff who is acting improperly, please
call us on: 08146026678

Or e-mail us on: info@enugudisco.com

You may rest assured that your report about any staff who is
acting improperly will be treated in the strictest confidence.

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